Inquiry into the sale of Paraparaumu Aerodrome by the Ministry of Transport.

The Government sold Paraparaumu Aerodrome in 1995. In May 2004, Parliament’s Transport and Industrial Relations Committee (the Select Committee) reported on a petition asking “that Parliament legislate to safeguard the long-term viability of Paraparaumu Airport as a full operational facility”. The Select Committee recommended, among other things, that “the Government hold an inquiry into the sale process”. On 19 October 2004, the Minister of Transport invited the Controller and Auditor-General to undertake the inquiry.

Scope of the inquiry

Our inquiry covered 2 phases by the Ministry of Transport in disposing of the aerodrome:

  • consultation with Māori and former owners of aerodrome land; and
  • the sale of the aerodrome by a restricted tender process.

Structure of the report

The report first sets out the background to the sale (Part 2). It then deals with the 2 phases separately, largely in chronological order. We deal with the consultation phase in Parts 3 and 4, and the actual sale process in Parts 5 and 6.

In Part 7 we identify the lessons that can be learned from the sale.

Our conclusions on the terms of reference

We reproduce the terms of reference in Appendix 1. In this part of the summary, we set out our conclusions on each term of reference. (Note that the order of presentation of the issues here differs from that in the report.)

Term of reference 1:
What were the Government’s policy objectives in relation to the sale, as expressed in Cabinet minutes or Ministerial and any other relevant directives? Matters to be considered will include:
a. whether the Government intended that the aerodrome should remain operational following the sale and, if so, why; and
b. how the rights and interests of former owners of aerodrome land (including Māori) were to be addressed.

The overall policy framework which dictated the disposal of the aerodrome was that:

  • Civil airports and aerodromes should be run as businesses.
  • Government departments should not be involved in running businesses.
  • State-owned businesses that were profitable should be corporatised and either operated as State enterprises or privatised.
  • State-owned businesses that were not commercially viable should be disposed of on the open market.

Paraparaumu Aerodrome was not considered a commercially viable operation in public ownership. Accordingly, in April 1993 Ministers directed that it should be sold.

The directive to sell the aerodrome was “subject to the Crown meeting its obligations to Māori under the Treaty of Waitangi and to former landowners under the Public Works Act”.

The Ministry was influenced by 4 other policy considerations, which were endorsed by the Minister of Transport, when carrying out the sale:

  • The aerodrome should preferably be sold as a single asset. Although it appeared that some aerodrome land may have been surplus to the Ministry’s existing operational requirements, decisions on whether that land should be disposed of should be left to the new owners, taking account of their future intentions. However, a partial tender would be considered.
  • Disposal should be both quick and complete, with no ongoing or residual Crown obligations in respect of the aerodrome or any aerodrome land. This concession was influenced by:
    • the pending capital charge on departmental assets (which would not, in the case of the Paraparaumu assets, be capable of being funded from revenue); and
    • consideration of the Crown’s responsibilities under the Public Works Act to former owners of compulsorily acquired land.
  • The aerodrome should remain operational for as long as possible, in accordance with the wishes of users and the local community. But there should be no obligation on any new owner of the aerodrome to keep it operational. This was influenced by:
    • the lack of commercial viability, as shown in independent valuations of the aerodrome as a going concern;
    • the aerodrome not having any critical significance in managing regional air traffic, or in aviation safety terms; and
    • the Ministry’s wish to not place the Government in a position where it would have to re-acquire the aerodrome should it prove commercially unviable under new ownership.
  • Proceeds from the sale should be maximised, subject to the sale process meeting government requirements.
Term of reference 2:
Was the sale process designed, and documentation prepared, in accordance with:
a. good practice as it applied at the time; and
b. the Government’s policy objectives?

Consultation with affected parties

The Ministry was aware from the outset that the Crown had responsibilities to those with former interests in the aerodrome land. Broadly speaking, those responsibilities arose under:

  • sections 40 to 42 of the Public Works Act 1981 (in respect of those who had owned aerodrome land at the time of its compulsory acquisition); and
  • the principles of the Treaty of Waitangi (in respect of Māori).

Former landowners

Between 1989 and 1991, the Ministry took steps (through another department) to identify – but not make contact with – former owners of aerodrome land that had been compulsorily acquired. In 1992, the Airport Authorities Act 1966 was amended to enable the Crown to transfer compulsorily acquired land to an airport company formed under that Act, and sell the Crown’s interest in the company, without affecting the Public Works Act rights of former owners of the land.

From this time, the Ministry proceeded on the basis that, subject to the sale being undertaken through the airport company mechanism before any aerodrome land was declared surplus under the Public Works Act, it was unnecessary to contact former owners of the land to inform them of any sale of the aerodrome.

Our conclusion:

  • The Ministry’s approach was consistent with the legislation applicable at the time.

Māori interests

The Ministry understood that the applicable Treaty principles were that the Crown had to:

  • act in good faith;
  • be well informed; and
  • avoid creating impediments to redress.

To give effect to these principles, the Ministry decided (on advice from the Crown Law Office and other departments) to consult with groups that had lodged claims with the Waitangi Tribunal affecting the aerodrome land. The object was to forewarn them that the Crown was intending to dispose of the aerodrome and to find out if they had any specific interest in the land that might require its retention in public ownership.

Our conclusion:

  • The approach of contacting Tribunal claimants was acceptable at the time.

The means used to achieve the sale

Between 1991 and 1993, the Government considered a number of options for disposing of the Crown’s interest in the aerodrome (see Part 2 of the report). In April 1993, the Government decided to dispose of the aerodrome by:

  • transferring its assets to an airport company; and
  • selling the Crown’s equity in the company, at market value as a going concern, to “user groups and/or other local groups”.

Design of the sale process was completed in early-1995. The term “user groups and/or other local groups” was defined to mean those with some connection with, or interest or experience in, the aerodrome (whether or not for aviation purposes) or the aviation industry. The Ministry’s approach to balancing the Government’s policy objectives involved:

  • the Ministry satisfying itself that tenderers had both the commitment and capability to continue to operate the aerodrome; and
  • using external commercial expertise to undertake a robust financial analysis of each tender.

Once those hurdles had been satisfied, price maximisation would be the final determinant.

These were, in effect, the evaluation criteria. There was to be no binding requirement on a purchaser to keep the aerodrome operational.

Our conclusions:

  • The Ministry’s approach provided an acceptable means of balancing the competing objectives for the sale. It was also consistent with the overall policy framework for asset sales and the particular policy position of Ministers.
  • However, the alternative of a more formal assessment process should also have been considered as part of an assessment of the risks involved in the sale.
  • The approach set out above effectively encapsulated the criteria by which tenders would be evaluated. But there was no documented understanding of how the evaluation would be conducted. We expected to find a better-documented understanding of how key decisions were to be made during the process.

Valuation of assets

The Ministry decided to value the aerodrome for the purpose of sale on a “going concern” basis, in a way that both maximised the sale proceeds for the Crown and minimised the incentives on the purchaser to recoup the sale price through profits on resale of the aerodrome or land that was surplus to operations.

The Ministry commissioned a valuation of the aerodrome. The valuation assessed the market value of the aerodrome as a going concern as $1.6 million. This included a net cashflow valuation of the core aerodrome assets, together with the net realisable value of land that could be declared surplus (identified from a 1989 proposal to rationalise the aerodrome business, and valued at just over $700,000). The going concern valuation compared with a net realisable value for all of the aerodrome land (were it to cease operating) of $3.5 million.

Our conclusions:

  • Sale on the basis of a “going concern” valuation was reasonable, given that the Government’s policy objectives for the sale were not only to maximise proceeds, but also that the aerodrome should remain operational for as long as possible subject to commercial viability.
  • Overall, the going concern valuation was reasonable.

The process of sale

The Ministry engaged Ernst & Young (EY) as commercial advisers and to manage the sale process. The Ministry also used a national law firm for legal advice.

EY’s brief was to manage the sale process, including the receipt and evaluation of tenders and negotiation with a preferred tenderer. Upon completion of negotiations, EY would make a recommendation to the Secretary for Transport on the preferred purchaser, the sale price, and any other conditions. Officials of the Ministry were responsible for settling the sale parameters (including evaluation criteria) and preparing the tender documentation.

EY’s consultancy proposal to the Ministry identified 4 phases to the process:

  • preparation of an Information Memorandum;
  • selection of tenderers and receipt of indicative bids;
  • negotiation of final sale and purchase agreement; and
  • settlement and transfer.

Our conclusion:

  • This was a standard process for asset sales at the time.

Avoidance of conflicts of interest

The consultancy agreement between EY and the Ministry contained an undertaking by EY to not act for another party in any matter that may conflict with the interests of the Ministry in respect of the sale project.

Our conclusion:

  • This was an appropriate requirement.
Term of reference 3:
Was the sale process undertaken:
a. in accordance with good practice as it applied at the time; and
b. in a manner that would have been likely to meet the Government’s policy objectives?

Consultation with affected parties

The consultation is described in Part 3, and we set out our conclusions in Part 4. The Ministry took advice from the Crown Law Office and other departments throughout the consultation process.

In December 1994, Ministry and other officials reported that the Treaty consultation had been completed, and that “there was general agreement that the claims, if successful, could be satisfied with substitute land or … other assets”.

Some of the claimants had urged the Ministry to exclude from the sale those parts of the aerodrome which were surplus to operational requirements. The Ministry’s position was that:

  • the purchaser of the aerodrome, not the Ministry, was best placed to decide what (if any) land was surplus; and
  • if surplus land were identified as part of the tendering process, it would be disposed of in accordance with the Public Works Act, and Māori interests would be protected.

At a late stage, the Ministry was approached by members of a hapū which was associated with one of the claimant groups the Ministry had consulted. The hapū members asked the Ministry to stop the sale process and recognise them both as eligible tenderers to purchase the aerodrome and as former owners of aerodrome land who were entitled to its return under the Public Works Act. The Ministry declined to halt the sale process.

Main points of our conclusions:

  • It would have been advisable for the Ministry to have obtained more information on the nature of the former ownership of the aerodrome land – some of which was recognisable as Māori land. There would have been a good chance that individual owners of that land were members of the same whānau or hapū. Had the Ministry taken this step, it is likely that it would have identified at an earlier stage the interests of the hapū which approached it.
  • It would also have been desirable for the Ministry to have informed all previous owners (or their successors) of its sale intentions – including the effect of the amendment to the Airport Authorities Act.
  • There was a genuine attempt at consultation. But the Ministry’s decision to not inform former landowners about the proposed sale compounded its difficulties in meeting the Crown’s Treaty responsibilities. After the initial round of consultation with Tribunal claimants, its approach focused too much on those groups and did not take sufficient account of what they were saying about who was affected. Where an iwi group has stipulated that the issue is one for a specific hapū or whānau to consider, or that hapū or whānau has itself raised the issue, the obligation to consult and take account of Treaty principles should include that hapū or whānau, unless it is unrealistic to do so.
  • It may well have been realistic for the Ministry to have consulted with the hapū concerned, once the Ministry was put on notice that the hapū had an interest in the matter. By the time the hapū representatives approached the Ministry, it was too late to consider whether any realistic tendering options were open to the hapū. But it might have been possible to do something had the hapū’s interest been identified at an earlier stage.
  • The Ministry could have done more to consider whether the concerns raised by Māori during the consultation could have been accommodated by making an arrangement – either within the sale process or otherwise – as regards land that may have been surplus to operations.

Management and implementation of the sale

We describe the implementation of the sale in Part 5, and our conclusions in Part 6.

Main points of our conclusions:

  • The tenders were analysed with the rigour to be expected for an asset sale of this nature. All tenderers clearly understood the importance of both capability and intention to continue operating the aerodrome, as well as price. But the evaluation criteria ought to have been formally documented.
  • The actual process used to evaluate and make decisions in respect of the tenders fell short of our expectations. The project governance arrangements – and in particular the role of a project group comprising officials and the Ministry’s advisers – were unclear. The project group took on a key decision making role, which had implications for the fairness of the process.
  • In particular, a decision by the project group to recommend negotiations with a preferred tenderer, before the closing date for other parties to submit revised tenders, was premature and inconsistent with good tendering practice. There was no unfairness in the result, but that does not justify the deficiencies in the process.
  • The standard of documentation for some parts of the sale process itself was poor. In particular, we expected the actual evaluation of the tenders to have been documented with reference to the criteria. They were not.

Avoidance of conflicts of interest

In our opinion, EY had a conflict between their role of acting as the Ministry’s commercial advisers for the sale and being named as the accountants for one of the tenderers.

The Ministry acknowledged that its officials overlooked the reference to EY in the tender, and that the oversight created a perception of a conflict of interest in the eyes of the unsuccessful tenderers.

Our conclusions:

  • Although a conflict of interest existed, it was not in our opinion so significant as to have required the commercial adviser to withdraw from the sale assignment. The position would have been different had EY advised or assisted the party in the preparation of its tender.
  • The Ministry’s commercial adviser appears to have dealt acceptably with the conflict of interest when it came to his attention. However, it does not appear that EY disclosed the conflict to the Ministry, as required under the consultancy agreement. Disclosure would have alerted the Ministry to the conflict and enabled it to assess its implications.

Lessons to be learned

We have drawn a number of lessons from the sale of Paraparaumu Aerodrome, that might be of value today. The main points are:

  • There is a need for any department to be clear on how the Crown’s Treaty partnership affects its work.
  • It is important to consider the implications of both the Public Works Act and the Treaty when selling or transferring Crown-owned land.
  • The events leading up to the sale provide a useful case study of what depth of consultation can be required in terms of the Treaty, the need to consider the full range of Māori interests that may be affected, and the need to keep an open mind on how those interests might best be addressed.
  • The sale itself is a good example of how competing policy considerations need to be balanced, and how there is sometimes no solution which can fully meet all of them. There is a positive lesson to be learned from the way the Ministry designed the sale process to achieve the best balance it could.
  • The process for selling a publicly owned asset such as this ought to be clearly documented. Those involved in the Paraparaumu sale seem to have relied on their accumulated knowledge of asset sales. That should not have been at the expense of proper documentation.
  • It is important to have clearly defined governance arrangements for any significant commercial transaction – especially when both officials and external advisers are involved.
  • The final stage of the evaluation was completed in a hasty manner. The lesson to be learned is that, even though the Ministry might have been open to bids throughout the process in this case, the process of receiving and evaluating tenders needs to be sufficiently robust to be, and be seen to be, fair to all parties.
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